Use of Lifetime
Trusts in the Estate Plans of
Parents of Young Children By Stewart
Richardson srichardson@thoits.com Parents
of young children should create estate plans that will take effect if the
parents die before those children reach adulthood. Such parents often direct
that, after the death of the surviving parent (or of the single parent), a
separate child’s trust will be created to hold each child’s share of the
assets. The terms of the child’s trust must be specified in the parents’ (or
parent’s) estate plan. Almost
all trusts for a child direct the use of trust assets as needed for the child’s
health, education, maintenance, and support until the child reaches adulthood.
However, parents have dramatically varying views with respect to distributing
assets to the child after he or she has become an adult. Some
parents prefer a “distribution trust,” in which the child will receive his or
her entire inheritance, free of trust, at one or more ages. For example, the
child might receive all of the remaining trust assets at age 30, or one-half of
the remaining trust assets at age 27 and the rest at age 32. Distribution
trusts appeal to many parents because the child is not controlled “from the
grave” - once the child reaches the specified age(s), the trust assets belong
to the child to spend in any manner he or she chooses. By
contrast, a “lifetime trust” is one that may last for the child’s entire
lifetime. Some parents use lifetime trusts to minimize transfer taxation (when
wealth is eventually passed to grandchildren) or to create a layer of
protection against future spouses or creditors. This article focuses on a
different use of lifetime trusts, as a tool for passing wealth from deceased
parents to their children while instilling the parents’ own values. Many
variations are possible, but a lifetime trust designed for this purpose might
have some of the features discussed below. ·
Some
parents do not want the child to be able to rely on trust assets for daily
expenses after the child reaches adulthood (e.g.,
age 23). These parents fear that, if trust assets are always available, the
child will not work hard, learn to act responsibly, and build a career.
Accordingly, they may direct that, once the child reaches a specified age,
trust assets may not be distributed to pay for the child’s ordinary living
expenses (but they may still be used for other beneficial purposes, such as to
pay for medical care or educational pursuits). ·
The
terms of the child’s trust may encourage or forbid distributions for particular
educational purposes. For example, some parents wish to financially support all
such pursuits, including, for example, multiple graduate degrees. Other parents
are more concerned that the child may become a “professional student,” and,
accordingly, limit the length of time that trust assets may be used to pay for
educational expenses. ·
Many
parents want the child to learn to live within a budget, but also want the
sustainable level of income the child’s trust can generate to be a part of that
budget. To promote this, they may direct that, after attaining adulthood, the
child will automatically receive all or a portion of the income that the child’s
trust generates. The child may choose to spend these income payments, or the
child may save and invest them (in order to build up his or her own asset base
outside the child’s trust). ·
Parents
may also include controls to ensure that the child cannot, directly or
indirectly, lose the child’s trust assets by making a bad investment or by
giving them away. Such parents often feel that the child can always make unwise
decisions with money that the child earns, but that the child’s inheritance
should operate as a “safety net” that will always remain available for specific
purposes (for example, to generate regular income for the child and pay for his
or her medical care). ·
The
child’s trust may also direct cash distributions in recognition of specific
events and achievements, such as graduation from college or graduate school,
marriage, or the birth or adoption of a child. These distributions essentially
serve as “gifts” from the deceased parents to reward the child’s
accomplishments and help with extraordinary expenses. ·
Some
parents prefer a hybrid lifetime trust/distribution trust approach. For
example, they may provide for substantial distributions totaling one-half of
the child’s trust to the child at specific ages, but direct that the remaining
assets of the child’s trust be reserved as a safety net in the lifetime trust. For
parents of young children, estate planning addresses the possibility that
significant wealth (including, for example, life insurance proceeds) will
eventually pass to those children under the terms of the parents’ estate plan.
Ideally, this transfer of wealth should occur in a manner that promotes the
parents’ values. The lifetime trust structure is often well-suited to that
goal. ________________________________________ This
publication is of general applicability and not specific to any set of
facts. Thus, it should not be relied
upon for any specific case or matter without further discussion. No attorney-client relationship is formed as
a result of your reading or replying to this publication, which is not intended
to provide legal advice on any specific matter, but rather to provide insight
into current developments and issues. Internal Revenue Service Circular 230 Disclosure.
Please note that any
discussion of or advice regarding United States tax matters contained herein
(including any attachments hereto) does not meet the requirements necessary to
be a “covered opinion” as defined in Internal Revenue Service Circular 230, and
therefore, is not intended or written to be relied upon or used and cannot be
relied upon or used for the purpose of avoiding federal tax penalties that may
be imposed or for the purpose of promoting, marketing, or recommending any
tax-related matters or advice to another party. THOITS, LOVE, HERSHBERGER & McLEAN 285
Hamilton Avenue, Suite 300 Palo
Alto, California 94301 Telephone: (650) 327-4200 Facsimile: (650) 325-5572 8030
Soquel Avenue, Suite 100 Santa
Cruz, California 95062 Telephone: (831) 425-4660 Facsimile: (831) 425-4543 |